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CASE STUDY

Pricing for risk

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How we worked with a lender to implement a pricing strategy that significantly improved their profitability.

A lender was looking to implement a risk-based pricing strategy. They wanted to offer lower interest rates to low-risk borrowers, while charging higher rates to high-risk borrowers. We worked with the lender to help develop and implement the strategy. 

 

Once the new pricing strategy was implemented, the lender saw significant improvements in their profitability. They were able to offer more competitive rates to low-risk borrowers, which helped to attract more business from this segment of the market. They also charged higher rates to high-risk borrowers, which helped to offset the increased credit risk.

Key results

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Significant improvement in profitability

Attracted more businesses from low-risk borrowers

Offset increased credit risk

Our approach

Review

We began by analysing the lender’s loan portfolio to identify the key drivers of credit risk. We looked at factors such as credit score, debt-to-income ratio, and loan-to-value ratio and used statistical techniques to identify the factors that had the greatest impact on credit risk.

Development

We developed a pricing model that incorporated these factors. We created a pricing matrix that allowed the lender to offer different interest rates based on the borrower’s credit risk. For example, low-risk borrowers might receive a rate of 6.5%, while high-risk borrowers might receive a rate of 12%.

Training

To ensure the pricing model was fair and transparent, we worked with the lender to develop clear and consistent messaging around the factors that impacted pricing. We also provided training to the lender’s staff to help them understand the new pricing strategy and communicate it effectively to borrowers.

Ongoing monitoring and refinement

We continued to work with the lender to monitor and refine the pricing model over time, ensuring that it remained effective in the face of changing market conditions and borrower behaviour. We also provided ongoing training and support to the lender’s staff to ensure they were able to effectively communicate the pricing strategy to borrowers. 

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